Commentaries

PMC Weekly Review - September 15, 2017

The e-commerce giant, Amazon (AMZN), cannot seem to find its way out of the news, and last week was no exception. Amazon announced plans to open a second headquarters, which will be known as HQ2, to supplement its current home base in Seattle, and it has created an enormous opportunity for whatever city wins the bid. In recent months, headlines regarding Amazon have been dominated with the company’s acquisition of Whole Foods (WFM), its impact on macroeconomic trends, and its growing decimation of brick-and-mortar retail outlets. The media has dubbed Amazon’s growth and dominance in the economy and financial markets as the “Amazon effect.” Typing those two words into a preferred search engine likely results in thousands of articles referencing the subject, and for good reason. But what exactly is the “Amazon effect?”

Most people generally know what Amazon does as a company: it sells cheap products on the internet with guaranteed fast delivery, which naturally would hurt traditional retail businesses. To get a bit more detailed, Amazon is disrupting the retail industry by offering customers more convenience, selection, and value than going to a shopping mall. Due to this, retailers are losing customers, market share, and employees, so it seems the majority of the buzz around the “Amazon effect” has a pessimistic or negative attitude. The Bespoke Investment Group even created the “Death By Amazon” Index to track performance of companies most affected by Amazon. Unsurprisingly, this group of stocks consists of retailers, and that index has underperformed the broader S&P 1500 Index significantly over the past two years. Furthermore, some economists have gone as far as to say that Amazon is beginning to influence the global economy, as the company might be placing pressure on future price, wage, and employment growth. Although these macro trends have yet to be proven, there is little doubt that Amazon is a juggernaut causing disruption. But is this necessarily a terrible thing?

Although retailers have generally been negatively affected by the “Amazon effect,” the company’s growth has opened doors for other industries to prosper. Given Amazon’s reliance on online credit card payments, banks and credit card companies could benefit. Also, customers have an increased expectation for precise deliveries, so logistics and software-tracking businesses who improve delivery efficiency and communication might also be in an advantageous position.

It is also worth highlighting that this is by far not the first time in history a phenomenon such as the “Amazon effect” has changed the economic environment. During the late 18th century, nearly all of the US population had some kind of involvement in agriculture. Today, due primarily to technological progress and disruption, less than 10% of the country works in agriculture, but we still produce an exponential amount of food compared to a few hundred years ago. Going back roughly 100 years, “Fordism” (referring to Henry Ford’s assembly line) disrupted the booming railroad industry by making automobiles available to a wider customer base, which created significant infrastructure needs. More recently and familiar, we also have seen disruptions by single companies, coined as the “Microsoft effect” and the “Starbucks effect.”

It is apparent that Amazon’s business model and sheer size will continue to challenge various industries and could potentially play a meaningful role in the global economy. That said, the world has continuously experienced innovation through its history, and that creates opportunity. The disruptions mentioned in the paragraph above certainly did not end in catastrophe and arguably improved overall lifestyles, employment, and economic growth. Clearly, it seems evident that only time will tell how the “Amazon effect” will play out.

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